Annual or Monthly Interest?

Some people seem to get confused about how interest on deposit accounts is calculated and paid. Some people seem to think that an account that pays interest annually – say on 31st Dec – will pay a full years interest on the balance as at 31st Dec. I have seen forums where people think that putting a big deposit into an account in December will give them a massive increase in the interest paid. I have also seen people looking for an account that pays interest monthly because they will be withdrawing money from the account during the year and don’t want to have the interest calculated on the balance at the end of the year.
Interest on a deposit account is almost always calculated on a daily basis. The interest is then credited to your account at the end of the year (on an annual interest account) or at the end of each month (on a monthly interest account). Usually the annual interest rate is higher than the monthly one. Some people use an account with interest credited monthly when they need a monthly income source for spending.